Brinker International Inc (EAT) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter 2011 earnings conference call.

At this time all participants have been placed on a listen-only mode, and we will open up the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host, Tony Laday. Sir, the floor is yours.

Thank you, Holly. Good morning, everyone, and welcome to Brinker International's third quarter Fiscal 2011 earnings call, which is also being broadcast live over the Internet.

Before turning the call over, let me quickly remind you of our Safe Harbor regarding forward-looking statements. During our management comments, and in our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's Press Release and the Company's filings with the SEC.

On the call we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the Company's ongoing operations. Reconciliations are provided in the tables in the Press Release and on Brinker's website under the financial sections of the Investor tab. Consistent with prior practice, we will be silent in inter-period sales or other key operating results yet to be reported, as the data may not accurately reflect the final results of the quarter referenced.

On our call today, you will hear from Doug Brooks, Chairman and Chief Executive Officer; Guy Constant, Chief Financial Officer, and; Wyman Roberts, President of Chili's Grill & Bar. Following the remarks, we will take your questions. Now I'll turn the call over to Doug.

Thank you, Tony. Good morning, everyone. Thanks for joining us.

Just over a year ago, you remember in Las Colinas, Texas, last March, we committed to a plan which called for substantial improvement in the long-term trajectory of the business. It started by laying a foundation for growth by strengthening the business model to provide returns we could reinvest in the business through initiatives which support [T-brand] equities like value in our base menu, which in turn would fuel our next investment cycle. All with the goal to provide better food service and experience while improving the economics of our restaurants.

So, let's take stock of where we are today. You saw in our Press Release that we continue to demonstrate impressive year-over-year earnings power with a 27% EPS increase. This performance builds on traction of initiatives put in place in the first half of the year, coupled with the change in top-line sales trajectory. Our focus on imbedding value into the menu through programs like the Chili's lunch menu and Maggiano's Classic Pasta section, as well as innovative culinary news that accentuate the kicked-up flavor profiles Chili's is known for, proved compelling to our consumers, contributing to top line growth. As you will hear from Wyman in a few minutes, these and other initiatives are having a meaningful positive impact to many aspects of our business.

The macroeconomic conditions have been a bit choppy, of course, over the last year. Today the economy shows some signs of moderating with a steadying job growth rates and consumer indices. While historically rising gas prices have not had a significant impact on the casual dining industry, we would be in uncharted waters if its prices significantly eclipse the levels last seen in the summer of 2008, particularly in light of the slow economic recovery. There's no historical precedent to indicate how we or the industry as a whole, might react. So we must ensure our operating model as a whole is sustainable in a variety of conditions by giving the guest better service, better food quality, while still delivering our net 400 basis points of margin improvement we promised.

It is because of the threat of things like a slow economic recovery and inflationary pressures that you do want us working on the strategies we've discussed. These initiatives are geared towards improving our basic financial fundamentals, enhancing value in our menus while delivering a superior customer experience.

The sales strategies being put in place at Chili's are pushing the business forward. That's good news. And at Maggiano's we continue our impressive sales trends with 3.4% sales growth. That's our fifth consecutive quarter of positive comp sales growth at Maggiano's. And 3.3% increase in guest counts, sixth consecutive quarter of traffic growth. Solid margin improvement continues with 160 basis points increase in operating margins, thanks in part to the robust top line, coupled with a menu restructure Maggiano's put in place last fall when we launched the Classic Pasta program.

Maggiano's continues to pull off the simultaneous feat of driving compelling value but also achieving improvements in their P&L. In February and March, Maggiano's scored for great food, also making the guests feel special, and value were at recent historical highs. The strong top line trend bodes well for Maggiano's future.

Now, internationally we did open our first restaurant in Russia, marking a new entrance in one of those crucial BRIC markets. At the same time we've had several openings to bolster our strong position in the Middle East and continue to see growth in Latin America. And, progress on our Brazil joint venture continues and we look forward to the first opening there later this summer.

So in March of last year, we shared with you an aggressive plan. The strategies impacting the business, first, will be largely focused on structural changes to the business model. With this piece well underway, sales initiatives meant to build a sustainable top line have been layered in and are starting to take hold. The sales elements are intertwined, drafting off each other while at the same time using our best operational attributes to bolster their strength. It is a cohesive plan which draws off of early operational successes to invest back in the business. These sales driving initiatives, which you can see, are now beginning to drive the top line. As sales and profits grow, they'll continue to be invested back in the business in a variety of ways, all of which ladder up to improved shareholder returns.

The progress made over this last year emphasized our belief in the progress and the process and give us confidence to reiterate again today our long-term goal of doubling our EPS in five years. It's aggressive, but it's getting closer each quarter as the initiatives gain the anticipated traction and begin to set in motion the next generation of ideas which will propel us toward the future.

Let me now turn the call over to Wyman so he can share some insights on the exciting work taking place now at Chili's.

Thanks, Doug. Over the last year I've shared progress on key initiatives meant to propel the business forward and deliver our plan to win goals. And to date, margin improvements have been the most evident contributor to our results. But, as we told you, the third quarter would be an inflection point for sales due in part to the unveiling of new strategies meant to drive the top line. We delivered on our promise with positive comp sales in February and March and solid traffic. In fact, our traffic numbers, as measured by MapTrack, have out paced the industry in both those months and comparable sales, when adjusted to reflect the one-week calendar shift, have sequentially improved throughout the quarter. Further indications that the strategies we are working on are the right ones.

As you may recall last quarter, we shared that our sustainable sales growth strategy had five elements. First, focus on key day parts. Second, build a stronger base menu. Third, keep the brand relevant and fresh. Fourth, continue our commitment to improve operational excellence. And, finally, to do all these things consistent with our objective to improve the business model. The positive momentum in sales during the third quarter is really a culmination of these five elements. So, I would like to take a few minutes and touch on each of these pieces.

Let's start with our focus on key day parts. As we said last quarter, we are currently targeting three key day parts -- early week lunch, dinner and the happy hour, primarily 3.00 pm to 6.00 pm and after 9.00 pm, Monday through Friday.

Early week lunch had been particularly impacted over the years, with the growth of fast casual and a more value-conscious consumer. As such, we launched a new line of Chili's Combo's featuring nine new items, including some great new sandwiches like our California Club that get paired with a soup or salad at $6, $7 and $8 price points, and outstanding food that positions us better against fast casual and with food costs that work with our new economics. Since the rollout of this platform, our lunch traffic has moved from negative mid-single digits to positive. As anticipated, we've had an impact on our mix, resulting from a lower check and preference being slightly higher than expected based on our test, and while we're satisfied by the results thus far, we will continue to learn from the results and work to optimize and balance to top line and profitability.

At dinner, we developed some products that leveraged our unique position in bar and grill space, as the brand with more kicked-up flavors. The Wild and Mild platform featured new twists on our best known categories, bringing innovative news to reinforce why Chili's stands apart and is like no place else in the bar and grill category. Our guests have taken notice with nice improvements in our dinner sales and traffic metrics.

We also rolled out a happy hour program with specially priced beverages and menu items. We know the bar aspect of our brand has significant upside potential. Connecting with friends at Chili's is a major reason guests come in, and structuring a happy hour program that reinforces our ability to meet that need even better is a top priority. We'll leverage the favorable margins the bar generates to continue to strengthen the business model. These day parts initiatives are just the first of a pipeline of a product of news which we will use to attract the attention of casual diners, reminding them why Chili's is the place to visit today.

Second, we're focused on creating a stronger base menu. Additions like two for $20 and the new lunch menu serve to enhance our value on the menu every day. Our leaner business model provides a financial framework that allows propositions like these to work. As a result, our guest feedback measures on value are some of the best we've seen in recent years, noticeably higher than third quarter last year and comparable to scores we've seen when we've run much more aggressive promotions.

At the same time, the team continues to work around core menu categories, making sure we're using guest feedback to improve the food that Chili's is known for. Innovation in key menu categories will be an ongoing process, which systematically considers the performance of items on the menu, including the ingredients that go into them, to ensure they embody our signature flavors and the quality our guests expect. Like our value scores, our food scores today are some of the highest in recent years, a clear indication that the process is working, and our guests are noticing the difference. But we still have work to do.

Third, it's about keeping this very strong brand relevant and fresh. We're doing this on a couple of dimensions. First, our re-image program is a very visible example. Oklahoma City is our first full market test, and initial guest response has been positive with results on both sales and returns meeting our expectations. As with all things we do, we've let the data and returns guide us. While reading results from the restaurant's re-image to date we've been able to identify those elements resonating most with the guests. As a result, we've refined the program, reducing the cost of a full re-image down from the $300,000 to about $250,000. From here we'll move forward, re-imaging four additional markets which are geographically dispersed and include multiple prototypes. This expansion in the program will further validate decisions made and dictate the course going forward.

From a marketing perspective, we're staying relevant and fresh by connecting with our guests more directly through our database and social media programs. As we've said over the last several quarters, it's been about growing the e-mail database to a critical mass that can drive the top line. The real power of this marketing channel is targeting messages. The capability provides a vehicle for us to communicate local messages that are of interest to our guests, such as a re-image of their local Chili's or the innovation or the introduction of new menu items.

Our other social media programs like Twitter and Facebook are also proving fruitful for the brand. Our Facebook following is significant and larger than most of our key competitors, giving us another way to connect with our guests and share news.

Fourth, we drive sales growth through our better guest experience grounded in operational excellence. It's about empowering restaurant managers to be leaders and ensuring initiatives like team service both elevate the guest experience to a higher level of attentive service and improve the P&L. And, while team service and phase one of the kitchen program are rolled out, these are still a work-in-progress. With a system as large as ours, the restaurants fall in a spectrum, from still wrestling with how to incorporate the initiatives into a natural part of the restaurant's DNA to being fully ingrained. We remain committed to the initiatives and ensuring the restaurant move up the spectrum.

As subsequent phases of these strategies, like the kitchen retrofit, take hold, the guest experience will be further enhanced by a more consistent experience with higher-quality food at an improved pace. These programs will accelerate the gains from the previous initiatives and aggressively help us taken market share.

Last, all of our strategy are filtered by the business model impact. The bottom line is, all sales initiatives have to maintain profitability. Just over a year ago we laid out for you a very clear plan to win. First, we opted to move away from aggressive discounting and use operational best practices and technologies to drive a sustainable margin improvement with a target of a net 400 basis points. Today the early phase of these strategies are driving us towards that goal. Second, we said the option of these practices would not only drive more dollars to the bottom line, but improve the pace of service and hospitality, as well as food quality and consistency resulting in a better guest experience.

Today our guest satisfaction scores have improved substantially over the prior year and problems reported by guests have declined. As subsequent phases of our plan to win roll out to the system, we expect even further progress on this goal. Finally, we predicted that this heavy lifting, combined with some newsworthy marketing and targeted efforts to improve our product, would result in steady sales growth, something Chili's hasn't seen in recent years, and today we're starting to see the progress on this goal as well.

So, as I look at the quarter I'm encouraged but not surprised by the results to date. Chili's is turning a corner. Our focus on key day parts, building a stronger base menu, keeping the brand relevant and fresh, improving operational excellence and improving the business model are intended to be collaborative, building off each other to drive steady sales growth. When supplemented with initiatives which serve double duty of improving the guest experience and increasing profitability, it combines into something powerful and sustainable.

We said our progress would be measured by guest feedback marks, food scores, sales and traffic metrics and the percentage of our guests reporting a problem. Today each of these metrics stands improved over last year and, in most cases, the improvement is significant. Today Chili's is a stronger brand and competitor than it was a year ago. Our guests are noticing the difference and telling us we are heading down the right path, but still have work to do. We remain committed to the goals we laid out just over a year ago and embrace the challenges ahead of us.

Now let me turn it over to Guy for the detailed financial perspective.

Thanks, Wyman, and good morning, everyone.

The 27% increase in our third quarter EPS, before special items, demonstrates the power of working the middle of the P&L to improve the business model. On the last several calls we touted margin improvements and intimated that top line would see a change in the back half of the year. Now, with sales building initiatives gaining traction, the future is setting up nicely. Today's results continue to show evidence of the margin improvement, while also showing a distinct change in the trajectory of the top line.

So let's talk about the results. Brinker revenues increased slightly to $717 million, total comparable restaurant sales were essentially flat on .6% traffic and 1.2% price, offset by negative mix due to the impact of the new lunch platform at Chili's. Wyman outlined how the various sales initiatives and the monthly comparable sales are beginning to reflect a noticeable impact on the business. Capacity was slightly negative, less than a 1% impact. Weather impacted our Company on markets fairly negatively in January, but was actually better in February on a year-over-year basis, resulting in very little measurable weather impact for the quarter as a whole.

Franchise royalties and fees increased 3.6%. This is due primarily to 20 net international openings and seven domestic franchise openings, as well as an increase in international comparable restaurant sales of 2.6%.

Cost of sales decreased by 130 basis points from prior year, to 27.2%. In order of magnitude, the improvement was driven by a more profitable value offering in January and menu improvements, worth 90 basis points, and favorable impact from menu pricing and other items of 50 basis points. This was offset by unfavorable commodities of 10 basis points stemming from higher produce costs, which were partially mitigated by lower poultry, dairy and other food costs. Looking towards the remainder of the year, the improvement in cost of sales willy rely less on commodity favorably and stem more from menu improvements and actual versus theoretical gains related to the implementation of new kitchen prep processes.

With respect to commodities, we are approximately 92% contracted through the end of the fiscal year. Provided this visibility, we expect to be slightly unfavorable as we move into the fourth quarter. We are 54% contracted through the end of calendar year 2011 and anticipate about 100 basis points impact to cost of sales due to inflation in our commodity basket for fiscal 2012 as a whole, based on our existing contracts and our forecast. As has been the norm, we will provide more detailed guidance on our August call.

Restaurant labor improved 60 basis points, to 31.8%. It's really a continuation of the story from the first half of the year. Team service continues to perform well, contributing approximately 100 basis points in labor savings. Additionally, this quarter included the first phase of our kitchen retrofit program, which you might recall focuses on optimizing the labor component of the prep process and maximizing food prep yield, expected to result in noticeable reductions in both heart-of-house labor and cost of sales through reduced waste.

This initiative is ramping up and meeting expectations as restaurants become more comfortable with the new processes and provide further reduction in our variable labor component, although not quite to the extent seen with the team service program. However, like team service, it will deliver a win for the guest, too, by contributing to more consistent execution of our menu.

As team service and kitchen prep begin to positively impact the business, our restaurant level managers have delivered improved earnings and seen better bonus payouts stemming from their successful execution of these key initiatives. We've asked our operators to do a lot, and they've delivered. There's still work to be done, but given how engaged and successful our restaurant managers have been thus far, we expect to see continued success in our execution of the next set of initiatives for the balance of fiscal 2011 and on into fiscal 2012.

While these better bonus payouts have resulted in less improvement on the restaurant labor line than we otherwise would be experiencing, they have laid the foundation upon which to improve margins and grow earnings again in fiscal 2012. Overall, we are happy with the progress to date on our initiatives and on the overall restaurant labor line.

Restaurant expense increased 30 basis points, to 22.7%, primarily due to higher advertising and supplies expense. This was partially offset by significant improvements in utilities, primarily due to the rollout of LED lighting to the entire Chili's system and lower insurance costs stemming from a favorable trend in incidents.

General and administrative expenses increased nearly $4 million over the same quarter last year to $36 million. The increase primarily driven by an increase in incentive-based compensation costs, professional fees and a reduction in transition services income. These headwinds were somewhat offset by lower stock-based compensation expense and payroll-related expenses. We would expect these trends to continue into the fourth quarter.

The tax rate before special charges was 27.1%, and indicative of a normal recurring yearly rate. Capital expenditures for the year-to-date were $49 million with year-to-date cash flow from operations at $188 million.

Phase two of the kitchen retrofit has now expanded to a total of 15 restaurants with the new equipment in place today. We would expect the rollout to expand further in early fiscal year 2012. Our new restaurant POS and back office systems are in place at 24 locations with the full rollout commencing in the first quarter of Fiscal 2012. And as for re-image, you heard Wyman discuss progress and the next steps to expand the initiative into four additional markets. Considering these factors, we expect total Fiscal 2011 capital expenditures to finish at around $80 million.

During the quarter, we completed an additional $107 million of share repurchase, buying 4.5 million shares. This brings our year-to-date share repurchase to $357 million, and the year-to-date 18 million shares.

In thinking about the fourth quarter, I wanted to share a few thoughts. First, you will recall that we have one fewer operating week than in the prior year, which contributed to approximately $0.09 to the prior year's EPS due to the leverage gained on fixed costs with the additional week of sales. We also expect headwinds on our commodities to increase from trends seen thus far in the Fiscal year, putting some pressure on the cost of sales line. Predicated on the continued solid performance of the Company, I would anticipate incentive compensation in both labor and G&A would continue to be higher than the prior year.

And, last, I would like to remind you Macaroni Grill transition service agreement has concluded in the third quarter. Accordingly, we will continue to assess the impact that inflationary pressures in the economy and competitive activity might have on the consumer, as we thoughtfully consider our pricing decisions and strategies going forward.

While we typically would not outline our projections if they were not materially different than our annual guidance, we recognize that it is harder to forecast when we're lapping a 53rd week in the prior year. Particularly in this coming quarter, when the extra week occurred a year ago. Thusly, we would outline that our expectations for fourth quarter EPS would fall between $0.43 and $0.47.

I said it before, but let me reiterate, the financial health of the Company is strong. The business model continues to improve, providing flexibility to invest in the business and return value to shareholders through dividends and share repurchase. There's still much work to do to achieve our goal of doubling EPS in five years, but we feel very good about the progress made thus far.

With that I'll now turn the call over to Holly to open the floor for your questions.

Thank you. Ladies and gentlemen, the floor is now open for questions.

(Operator Instructions)

Our first question is coming from [Jeffrey Bernstein]. Please announce your affiliation, then pose your question.

Hi. It's Barclays Capital. It's actually Sophia Siddiqi filling in for Jeff.

Hi, how are you?

I'm good. I have a question regarding your goal to double EPS by fiscal '15. While you haven't offered specific color for full EPS growth, your guidance seems to imply an acceleration in fiscal '12 relative to the outside growth that we saw in fiscal '11, especially if your guidance for fiscal '13 to '15 is a more normalized 10% to 12% growth. Are you still comfortable with acceleration in EPS growth in fiscal '12 on a 1% or 2% comp, or has the recent acceleration in commodity cost inflation now limited outside fiscal '12 EPS growth? Thanks.

Thanks, Sophia. You're correct. The outline of doubling EPS would inherently imply, given that 10% to 12% expectation for fiscal '13 and beyond, to imply an acceleration in fiscal 2012. We are still comfortable with that. We also would say it's likely that fiscal '13 would be a little above that range as you see some of the initiatives that are moving forward consistent with our CapEx guidance of $80 million this year. Some of those initiatives are coming in a little bit behind where we originally intended them to be from a timing perspective. Certainly feel comfortable with the success of those initiatives, but from a timing perspective they may come a little bit later, which might mean a little better EPS growth in fiscal '13 than we might originally thought. But the underlying premise you have of accelerated EPS growth in fiscal '12, we're still comfortable with that and we'll obviously provide more clarity on our August call.

Okay. And then one more question on commodities. Can you go a little further into what's contracted for '12, and what level -- what might be your greatest vulnerabilities?

Well, consistent with what we've talked about in the last month or so, as we've visited many of you, beef continues to present the most significant inflationary pressure in our commodity basket. That is an item that we have contracted through the August time frame, particularly for burger meat. So we do expect that in the first half of fiscal 2012, we'll be renewing that contract. If we were renewing them today, it would present a pretty significant inflation over what we have contracted at today.

We do have chicken contracted through the end of the calendar year, but that's an item that has seen some deflationary pressure. So hopefully there will be an opportunity there to renew that contract at favorable rates.

And, as we talked about, on our dairy contract, while spot markets would imply quite a bit of inflation, we believe, based on where we're currently contracted today, we would expect to see flat or little change in our dairy contract, perhaps even some favorability in fiscal '12.

Thanks.

You're welcome.

The next question is coming from David Palmer. Please announce your affiliation and pose your question.

UBS.

Hey, David.

Hi. First of all, thanks for your help on that fourth quarter clarification on earnings, which seems to be a bit of a mismodeling thing on the part of the street and us, and congrats on the sales trends turning positive lately.

As you think about the net 400 basis points you are talking about, could you maybe take a step back and give us an update as to where you see where you are today, what initiatives have yet to play out in terms of -- I know these lists of initiatives are -- there's a few of them. There's labor back in house, there's new kitchen equipment. Where do you stand on that? Any texture around that as we think about fiscal '12 would be great to hear. And, also, with regard to re-imaging, how we think about CapEx into next year, how we think about that boost to sales. That would be wonderful to hear about as well. Thanks.

Okay. Well, I could tackle the first part of your question and let Wyman give you a little color on the re-image. We've been asked that question before, David. I guess I'd classify it as, we see ourselves in the second or third inning of a game when it comes to the margin improvement initiatives. Team service is well entrenched now, we're seeing the benefits of that. That is hitting the expectations we initially dealt, which is right around the 100 basis points of margin improvement. And, of course, we really like that on the finance side because there's very little capital, or, actually, no capital investment at all in rolling out that initiative.

The next is the prep component of the changes we're making in the kitchen. While those fully rolled out late really last quarter, early this quarter, it does take some time to get traction, as Wyman described earlier. You see some of the wage rate changes fairly quickly, because, of course, that happens right away. But the productivity and the waste improvements take a little while to roll through. It would be our expectation that this fourth quarter we're in right now, we would see the vast majority of the benefit from that aspect of our kitchen retrofit. And, while we don't think that's as big as team service, it's still significant.

The places where we really haven't gotten much of a start, in terms of impact to the P&L, although I think we're quite a ways down the road in terms of understanding what it could mean in the future, are the installation of the kitchen equipment, and the insulation of our point of sale and back office systems. Both those are -- the first, kitchen equipment, is in 15 restaurants today. The point of sale and back office equipment is in 24 restaurants today. Both are anticipated to start rolling out aggressively in the start of the first quarter, end of the fourth quarter. So we would expect to see progressing benefit from those as fiscal '12 rolls through, and the point of sale and back office systems will be complete in fiscal 2012. The kitchen retrofit will take even into a little bit of fiscal '13 to get completely through the system. So we would expect to see progress on both of those. And the kitchen equipment is certainly of a magnitude of team service, and the point of sale and back office systems is probably in the order of magnitude in the kitchen of the future prep component that we've already rolled out.

So that gives you some sense -- sorry for the long-winded answer, of the timing of those and the benefits. But we would expect, by the end of fiscal '12, we would almost having everything in place. The full impact of all of it would come in fiscal '13.

Now, on the re-image, we would expect -- we talked about CapEx being in the $160 million range for fiscal 2012. With some of the capital not being spent here in fiscal '11, some of that may now move into fiscal 2012 and require a little bit more CapEx spend. But that will only be to effect things that we were expecting to get done this fourth quarter that may now only happen in the first quarter next year, and the bulk of that would be the re-image and implementation of the kitchen equipment.

Wyman, you want to talk about the sales and what we've seen consumer feedback and initial traction on the Oklahoma City re-image test?

Yes. In the restaurants we've put the re-image in so far, we're very encouraged by the results. It's got us now moving to four additional markets that give us some geographical dispersion of the prototype that we're using. We've also had some very good success reducing the cost of the re-image. So, we're moving forward, very optimistic about where we'll go from there. And after we finish these next markets, we'll have about 60 restaurants re-imaged, and that should be a significant enough number for us to feel good about then aggressively moving it forward.

The impact to next year will really be dictated somewhat on how fast we can get the re-image program rolling through, but we're optimistic that we can move fairly quickly and that it would have some impact to next year's sales, although it won't be -- it won't be huge because of just the timing of when those things will -- those restaurants will actually have the full remodel in them throughout the year. So, we are counting on having some impact, but I wouldn't say it would be excessive.

Thank you, guys.

Thanks, David.

The next question is coming from Joe Buckley. Please announce your affiliation and pose your question.

Bank of America Merrill Lynch. A question on the --

Hi, how are you?

Hi, how are you?

Good.

A question on the traffic numbers for the quarter. You mentioned the pretty dramatic shift in lunch. I think you said dinner improved. Is dinner traffic actually up year-over-year, or did it just get a little less negative ?

Well, Joe, let me jump in on that first. Obviously, lunch is where the most significant traffic benefit came. Clearly, the introduction of the new lunch platform is the area where we saw the most traction, and I think as Wyman had mentioned in the past, was the area we had needed it the most. Dinner we had not -- hadn't seen the declines we had seen in the lunch program. We had not seen dinner. Traditionally dinner for quite some time, even in what was an overall declining traffic environment, it held in there pretty well. But in terms of the traffic change, in order of magnitude, the lunch was by far the most dramatic improvement we saw.

Overall, I think dinner has continued to hold in there. I think we've seen a little bit of traction at dinner by having the $20 dinner for two on the menu. There is no question that a significant majority of the traffic increase came from lunch.

But dinner is positive. So we are seeing positive dinner traffic trends. So we're seeing both day parts moving in the right direction and running positive.

Okay. And something about the game plan going forward with the lunch program, it seems like lunch is a difficult category for full-service casual dining to make a stand, so to speak. How are you thinking about it going forward? Will you support it with TV advertising, and try to continue to continue the traction you've gotten so far?

Yes. I don't know if I share that opinion that it's hard for casual diners to compete. I think you have to address the key issues, that it may not have been as top of line for us, and it could have been brought home a little more directly with some of the fast casual chosen -- and part of that is just value in price.

So, we're addressing those issues and then working a model that, as you've seen with the fast casuals, there's plenty of margins in those price points. The margins that they're extracting are not -- not anything that we can't make a business case out of ourselves. So that's with we've done.

So, when we come in with $6, $7 and $8 price points we are now competitive. That's a major issue that people have had with casual dining. The value hasn't necessarily been there. The other issue we've got is how fast. And what are we going to do to address these issues?

So, again, a lot of the initiative we've talk about, team service, some of the technology improvements, the base menu itself and the changes we've made really address that ability for us to deliver a faster experience for those lunch guests, which is what they're looking for.

And so we're -- we're working off of those -- so we know what the guests are looking for, and we think we can actually address those issues, and we're showing in our results that, yes, we are -- we are giving them what they are looking for, and able to make it work for us at lunch.

Okay. I think the Release mentioned marketing spending up year-over-year. Can you tell me a little bit about that, and what the game plan is going forward on market?

Yes. There was -- again, with the introduction of the lunch menu, we did spend a little more in late January and early February just to get that -- just to get that new message out there and introduce that new menu. And since then we've dropped back into our typical marketing pattern with regard to our average weight levels and are seeing sustained performance.

We anticipate that we will be able to continue to sustain these initiatives. We'll work on using various mediums. Again, we talked about the e-mail database and our social marketing to continue to carry multiple messages. We think that is important when we talk about these day parts, lunch, dinner, happy hour. So, it won't all be through network television advertising. But we think with the current budgets we have, our historical budgets, we should be able to accomplish that.

Okay. Thank you.

Thanks, Joe.

The next question is coming from Destin Tompkins. Please announce your affiliations and pose your question.

Morgan Keegan.

Wyman, you mentioned in your comments around the initiative to focus on key day parts, a pipeline of product news and being in the first of what's coming. I would be curious to hear your thoughts on how you compare your pipeline of products today, versus where it's been the last couple of years, and do you feel like you've got a little bit more exciting new product news coming given how competitive the industry is at this point?

Well, Destin, that's interesting. We do have a lot of great work going on in the culinary aspect of the business. I think we're -- we're balancing new product news with also improvements to really core menu items and taking our core menu items to another level of satisfaction with regard to guests, because I think that's where this industry sometimes gets a little off track and loses focus.

There's so much energy put into these limited time flavor of the month introductions and lose track of the fact that the bulk of the business still happens on the core menu. And so with things like 2 for $20 representing a significant piece of our business and our core users, and now with the lunch combos representing a significant portion of our lunch guests, we're going to balance bringing in new flavors and new tastes with also really understanding how to make those elements of the business work hard for us. So that's what we'll see in terms of balance.

There will be some new news, but also if you look at the category and the key competitors that do well, a lot of it is off a much stronger base and making sure that your base business is really working hard for you. So we're going to balance that up a little bit.

Okay. And looking at the key openings, I think that was in the Press Release for franchise openings, both domestic and international, it looked a little lighter than what we had seen last quarter. Is that just a function of timing, or are there some delays out there that you're seeing?

Destin, it's Doug. Yes, I tell you what. As you hear the world news over the last six month or so, it has definitely been challenging. A lot of our openings, international -- we're going to be in the Middle East, and the social and political unrest that we've seen has definitely impacted our opening schedule. Honestly some of the drug cartel activity in Mexico, in pockets. So it really is quite remarkable that our international sales are positive, 2.6 for the quarter. In fact, it's our fifth consecutive quarter of positive sales trends, because we have five restaurants in Japan that were impacted by tsunami.

Luckily we've had some strong markets, we've had places like western Canada and Puerto Rico, United Arab Emirates has come back strong. But we've certainly had our ongoing business -- our current business as well as openings, be delayed. So, we'll come back next quarter and give a better picture of how we set against that initial $425 goal we talked about last March, but it has been challenging this year.

With all the good news top line around the world, there has been a lot of challenges, opening restaurant and running our existing restaurants. I didn't mention Egypt, that's been one of the most challenging locations, as well. We'll come back next month and give you an update on how we're doing. But we are definitely going to be lighter than that original schedule.

Great. Thank you.

Thanks, Dustin.

Thank you. Our next question is coming from Chris O'Cull. Please announce your affiliation and pose your question.

Yes, SunTrust.

Good morning, Chris.

Good morning. Guy, my first question relates to modeling. I apologize if I missed this, but what is the comp assumption implied for the earnings range for the fourth quarter?

We didn't provide a comp assumption, Chris, but you'll recall that overall we expected breaker aggregate sales to be flat or down 2% for the year. We still expect to be within that range. And it's underlying that implies we expect it to be flat to positive in the back half of the year and we got there in the third quarter, and we would expect that to continue in the fourth quarter.

Okay. Great.

And then, Wyman, I had a question on changes in menu mix. Why isn't the Company better at predicting usage of promotions like 3C and this new lunch menu, and is it your intention to improve the menu mix at lunch during the next few months?

Well, I don't know exactly -- so we test everything. So it's not like we walk in blind when we roll something out. We test all of these initiatives in markets. But it's -- it gives you a pretty good sense. But you can always be off a couple of points, and a couple of points can make somewhat of difference. And that's all we were off with regard to where we thought we would come in with this menu.

Also, we don't necessarily, when we test, throw all of the advertising that we do when we roll national. So, those are some of the variables that make it an inexact process. But it's pretty close, and our mix is not that far off from where we would have anticipated it, and we're actually seeing within the $6, $7 and $8 options better preference in those higher-end price points.

So, the combos are mixing as a group higher than we thought. That has an impact. But we're also seeing within those combos a higher preference on those $8 items. So that's just the process.

Should we expect the check average to improve a little bit, or is there anything --?

Yes. When you roll out a new initiative like this, and as we start to get more familiar with all -- there are a lot of the items, nine new items, and we start to understand guest satisfaction levels and how the preference works, we see -- we'll be able to better manage our mix to some higher levels.

The fundamental thing, with regard to where we sit today and what we're focused on is just the value proposition. How are our value scores holding up with our guests? That to us is a key indicator for future traffic and our competitiveness, and we're very encourage by what we're seeing there. It also tells us that, hey, if we need to think about pricing down the road we've got ourselves in a solid position with a value proposition that's as good as it's been in white a while, off the base menu to give us a little flexibility in doing that. But we have already started to see improvements in our mix and in our -- in our relative year-over-year comparisons to check average.

Okay.

Guy, a portion of the CapEx originally planned for this year seems to be pushed into next year. What's a reasonable assumption for CapEx in fiscal '12?

We think, call it $170, $175 million range. We originally thought $160 million. So we'll see some of the decline this year push into next year. And, frankly, we'll probably see a little of what was in fiscal '12 push into fiscal '13, as well. So, no -- other than the cost references Wyman made earlier that we do believe we've been able to engineer that re-image to get the same benefit at lesser cost. So, hopefully, the CapEx will be lower for that reason. The lower number this year and the higher number this year, that doesn't reflect any change to the extent of the initiatives. We still intend to roll the kitchen out everywhere and to re-image the system as we planned. It's just more timing of moving those around.

Okay. Great.

And my last question relates to Maggiano's. Doug, given the improvements you've seen in the sales and margin performance with that brand, when does it make sense to restart development?

Well, Chris we're still evaluating that. Of course, we keep our pulse on real estate across the country. We are looking at a new building prototype. So, as soon as we know something ,we'll let you know. But we are seriously evaluating whether to build more Maggiano's and excited about the opportunities as the results would show.

Okay. Great.

Nothing to announce today.

Thanks.

Thanks, Chris.

Your next question is coming from John Glass. Please announce your affiliation, then pose your question.

Hi, good morning. It's Morgan Stanley.

A couple questions. First on the labor line, Guy or Wyman. It didn't show any sequential improvement as it has the last couple of quarters. So, what is that? Is that still a seasonality impact, and are you still getting some of the benefits? Or -- and related to that, when you contemplated the 400 basis point improvement in margins, were you thinking about bonus accruals and the success of it would trigger those, or is that absent that? And, so, some of the improvement will get offset by the higher compensation?

A good question, John. So, what you always have to watch is what's happening year-over-year on those accruals, as well. And last year in the third quarter, you may recall, we started out fairly well last year, and then with 3C driving some pretty good sales. And then we struggled in the third and fourth quarter and pulled down some of our bonus accruals last year.

So, when you've got similar bonus accruals from Q2 to Q3 this year, but the lap over last year looks a lot -- there's more bad guys from the higher bonus accruals, this year than there were last year. So that's part of it that didn't show the sequential improvement, because the effect from team service is the same from Q2 to Q3, and we did see a little bit of traction on the prep processes, so those things in themselves would have had you expect more sequential improvement. But it is those incentive comp payments that are offsetting it so that you don't, obviously, see it sequentially.

As for the 400 basis points, we knew that if we delivered on these kind of results we would have higher bonus payouts. But, of course, as you know, John, that gets reset. We set the plan next year, the expectations increase again, and then we have to keep continue to deliver on the expectations in order for those bonus payouts to continue to increase. But as we said many times on the call before, you want us paying better bonuses and taxes because that usually means we're earning a lot more money.

That's helpful.

And on the 100 basis points of cost of goods pressure next year, is that with or without pricing?

It is without right now. And, as we said, we are weighing to see what we want to do with pricing, depending on what happens with the competitive environment this -- this more strong P&L that we've got now gives us the flexibility to determine whether there's an opportunity for us to move some share by not taking price. If that opportunity doesn't present itself, then we of course can take price like everybody else. But we would like to see what happens competitively before we make that decision.

And then just to understand, I think, one of the first questions was about 2012 earnings in 2013. People had backfilled into a $2.00 number next year, and then a more consistent growth rate in '13 and beyond. Are you saying now that given that some of the CapEx has slowed in some of those initiatives, we may not see that kind of rapid growth in '12, and may see it more balanced between '12 and '13?

In a sense, John, you've asked for a little bit of a preview and what we're going to talk about in August. But, when you say balanced, 2012 is still a heavy-lifting year for us in order to deliver on that comparison. So, while it may be a little bit changed from what you would have originally modeled, I would not consider it a material change, where now '12 and '13 are going to deliver equal levels of results. 2012 still has to be a heavy-lifting year for us.

Thank you very much.

The next question is coming from Brad Ludington. Please announce your affiliation, then pose your question.

Hi. Brad Ludington, KeyBanc Capital Markets.

I had a couple of questions trying to clear some stuff up -- on the savings that you were carrying with Macaroni Grill and On The Border, I think you said last quarter it was going to be $3 or $4 million this year. First off, that fully rolls off after the fourth quarter, correct? And, how much of that was attributable to the Macaroni Grill?

They were fairly equal, Brad. So they were about 50% each. Macro is maybe a shade more, but they were pretty similar.

Okay. And they do roll off after the fourth quarter?

Yes. Macro rolled off this quarter and On The Border will roll off at the end of the fourth quarter.

Okay. And I apologize, my phone cut out. I think John right before me just asked about 100 basis point pressure on fiscal '12 cost of sales. I just wanted to clarify, that is what you said for the fiscal year, correct?

That is what we said.

Okay. And really, beyond that, I think all of my other questions have been answered. Thank you.

Great. Thanks.

Your next question is coming from John Ivankoe. Please announce your affiliation, then pose your question.

Yes. Just a few follow-ups for me at this point.

Firstly, could you remind us what the service agreements were in dollars for the Macaroni Grill and On The Border, and where those were recognized. Were those off sets to G&A?

They were off sets to G&A, John, and they were around a couple million dollars each.

Okay. For the year?

On an annual basis.

Okay. Fine.

Secondly, following up, it does look like much of the industry is explicitly talking about pricing of 2 to 3 and in the few isolated cases it's 3 to 4. Should we -- given the fact that -- you're not saying that they're saying that, I am, and they certainly are on the conference calls. Is that almost an implicit ability that Chili's has to take pricing? Or, are you sensitive perhaps to previous years, that your pricing got a little high relative to the competition and you specifically, you want to take pricing less than competition? In other words, should we think about pricing in line with competition or, by definition something materially less than competition, whatever that pricing might be?

John, I think we find ourselves we think in a pretty advantageous position where, again, with the value proposition, the strength and we think we do have the potential to price, but we really want to grow traffic. And so we think if we can get the same result while people are pricing to maybe be a little less aggressive and drive traffic and get the same result with regard to an earnings play, we'll probably lean toward that.

So we're going to take our pricing strategy and use it aggressively as we go through this year. And when I say that, that doesn't mean we're going to price aggressively up, that means we're going to look at it and maybe play the market a little bit towards the lower pricing strategy to drive traffic.

Perfectly understood.

And then, finally, what changes is the customer noticing in team service? I mean, the attentiveness? Speed of service? Are they perceiving the service to be more harried, less focused? What is it that the consumer has responded to you for what is actually a pretty substantial change in the way they were served previously?

Well, it's interesting. The guests are giving us better attentive service scores, as well as speed. The other flip side of that is we survey our team members, and we've just gotten information back from them, and they're getting a lot better about their work experience, significantly better. So, we just surveyed 80% of our team members, where 75% of our members have given us recent feedback. So, this initiative is working really well on our model, that if can get our team members to feel better about their work experience and work harder together and make more money, they'll translate that over to our guests. And we're seeing that in metrics that we track on both the team member side as well as the guests.

Thank you. And final question is regarding kitchen retrofit. I think you said, it sounded like it would at least 100 basis points additive. Given that you're in 15 stores, if I wrote that down right, now, how old you handicap that? Higher? Lower? I know there's some food change. Perhaps some cost change, It more efficient, it might be faster, more consistent, less waste, in other words, returns. What do you think, given the fact you've had some experience seeing new system in place? What might the expected benefit be? Can it be even be better than the 100 basis points that you discussed earlier?

We haven't specifically discussed 100 basis points, John. But implied it's a big idea. We think it's a big idea, like team service is a big idea. We -- in any of the cost savings we modeled, we never factored in, even though the potential is there, for new innovation, faster speed, more consistent cooking and all that might mean in terms of creating a better guest experience and what could do to top line. We all recognize that's there, but we haven't banked on that in any way is part of the margin improvements we've talked about. That was specifically focused on the labor improvements we could get. And we also think there is waste benefit, as you say, and even utility benefit, because the equipment is much more energy efficient.

So, not intending to dance around your question, but it is a big idea, and I think we are getting a good sense now of what we think it could provide for us, and we're still very encouraged by what we're seeing.

Thank you.

The next question is coming from Howard Penny. Please announce your affiliation, then pose your question.

Hi, thanks very much. Doug, your comments in the beginning were in somewhat stark contrast to what other operators say in terms of what the impact is from higher gas prices on casual dining sales. I was wondering if you could flesh that out a little bit?

Well, Howard, I'm going partially historical when we've seen high gas prices. One of the advantages of Chili's, (inaudible), is we've had lots of locations, so there is a nice convenience factor to our consumers, particularly where they live. And historically we've seen more impact by employment and jobs. So, if there's a shining light a little bit going on right now, it looks like that side of the economic situation is getting better.

So, I think, as we've said over and over on the call, our goal is to make our operating model sustainable in every kind of economic environment. The consumer is certainly going to be under pressures for gas and pressures for other food stuffs. But, the value spot where we are -- in the Maggiano's menu, now Classic Pasta, on the Chili's menu with the lunch combos and the 2 for $20, we feel really good about our convenience factor as well as the value offerings versus where we were a couple years ago. And if the gas prices get much higher than where we are historically, we'll play it out. It's about stealing share, and we feel good about where we are, and all the consumers are going to be playing on the same slippery playing field.

We like where we sit and we're not going to use the economy as an excuse, because, again, the consumer is still going to keep eating out, and we like the choices we're giving them now much better than we might have a couple years ago.

Thanks. And, lastly, Guy, the 15 stores that you've converted, is there anything that you've learned in the test that would prevent you from rolling that out?

No. Howard, this is Wyman. No, we're very encouraged. We've actually taken -- we had the five restaurants here in Dallas that we really used as a lab almost to understand the equipment and the food aspects of cooking on this different equipment. And these last 10 restaurants we went to were money more about, okay, what does this thing look like if we were to start to roll it? Without nearly the level of experimentation we had in the first five, and it still -- we've just had those -- some of those restaurants are within a month of having it, but we're very encouraged by what we've seen and we're now tightening it up and getting it buttoned up for a rollout.

So, we see ourselves moving forward at this point. So, there's a couple of boxes we still is to check. That will happen in the next few weeks, really. And then from there we're anticipating moving forward.

So all of the product specs needed to be able to execute the menu are all in place?

Yes. We've got everything pretty much ready to go to roll this out. Our final checks, really, are with consumers again. Everything we've got anecdotally and everything we're seeing in the restaurant and we're just doing our final consumer checks with research to validate the guest experience. But everything we've got up until that final check has got us very optimistic.

Thanks very much.

Our final question for today is coming from Sarah Senatore. Announce your affiliation then pose your question.

Hi. Sanford Bernstein.

Just two follow-up questions. First is on labor. I wanted to go back to that and understand, is what you're paying bonuses on, is that different? Has this become a more variable line? I know you're lapping and somewhat easier to compare, but I'm just trying to figure of there's reason to think that we should expect maybe more upside going forward to flow through the compensation than we would have in the past. So that's question one.

The second question is actually on Maggiano's. Obviously, much tougher compares this quarter, sequentially, but it slowed a little bit. I was wondering, are you still seeing the differences in terms of your kinds of customer bases, like where their strength is, whether it's affluent customers or business spending? If you can just give me some more color on strength of relative customer cohorts?

Let me start with your labor question, Sara, and then Doug will take your question on Maggiano's. Of course, we never broke out this line before in past years, Sara. This is the first year we've broke it out. And, of course, we provided last year's color as well. But we never had to talk a lot about that line specifically until this year. That line, now because it's broken out from the larger restaurant expense bucket, is more variable than the previous big restaurant expense line used to be. Restaurant expense has most of the fixed components in it now. Whereas now the restaurant labor line has a lot of variable components in it. There's still manager salaries, which are somewhat fixed, our heart of the house kitchen employees tend to be a little more semi-variable, and of course our front of the house is extremely variable. And the incentive compensation that we pay to our restaurant level managers is variable as well.

And what happened, as you know , the last couple of years weren't great years for Chili's and we didn't pay very good bonuses to our managers because the performance wasn't good. The metrics haven't changed. What's changed is the performance is significantly better and a great deal of it has been delivered by operators. A whole new service platform in the front of the house that they had to, basically, get every front of the house team member on board in delivering and giving the guest a win, which they've clearly done. Focus on team members who helped us do that. And now implementing our new prep processes with our heart of the house team members -- there's been a lot of heavy lifting by those managers. They're not just getting paid more bonus because of the heavy lifting. They're getting paid more bonus because the heavy lifting has resulted in better results.

Now, as with any bonus plan, going forward the expectations will rise, and next year we'll have to deliver better earnings again than this year, and the bonus expectation will increase. But if we see people continue to deliver really great results versus those expectations, then we'll pay incentive compensation to them for doing so.

Doug, do you want to talk a little bit about Maggiano's and what we've seen in

Yes, Sara. We still feel very bullish. I think what you're seeing is a change in the way the brand is used. You're seeing better lunch sales. Part of that is Classic Pasta and a lower check. You're seeing catering business up, so the delivery part of the business. The Classic Pasta added to the menu is changing the consumer experience. We're trying to get fox to think about Maggiano's on Tuesday when they're hungry for great pasta versus waiting for their wedding or anniversary or birthday.

So, positive traffic, positive top line and a little bit lower check is all good. As Wyman said at Chili's, we're trying to build traffic over a longer period of time, and what Maggiano's needed to do was expand their experiences from just a special occasion to other uses of a great Italian restaurant. We think that's happening .

Thanks.

Thanks, Sarah.

Well, thanks, everybody. Let me wrap up here. So just over a year ago as we said a couple times today we've committed to long-term goal of developing EPS. I hope on today's call we've heard your questions on whether some of drivers of the long-term growth and keys to sale sustainability. I hope today's call gives you a greater confidence in Brinker's ability to deliver.

We have demonstrated solid earnings growth driven by initiatives meant to strengthen the business model, but also improve the guest experience. While structural margin improvements have been gaining traction, sales previously were more elusive. Today by announcing positive comparable sales, and even better traffic numbers, we think, as Wyman said, we've turned a corner. It just want to add to the conversation that Wyman was asking about pricing power and taking check -- the value scores at both Chili's and Maggiano's recently are very, very good. So, with the change in our business model we do have some flexibility in terms of watching what happens to commodities and deciding what pricing to take.

We do think we're in a very nice position. We want to keep billing on traffic and build on those great value scores. So, we have a number of sales-focused strategies that Wyman outlined are taking shape and we think poising the Company for meaningful sales growth moving forward.

But ultimately all of the initiatives are geared to the guest experience, resulting in profitable long-term growth and we think our strategies are the right ones for both our Company and our guests. And that will allow us better -- a way to avoid some of the challenging factors like rising gas prices or whatever commodity increases may come and provide the guests value-oriented options to suit their needs.

So, you augment balanced and disciplined financial strategies, the shareholder value-creation proposal we think in front of us is pretty powerful.

So thanks for joining us on the call today. We look forward to speaking to many of you later today. Thank you.

And thanks, Holly.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time. And have a wonderful day. Thank you for your participation.